Tuesday, November 15, 2016

Good and Bad Deflation: From the Glossary Notes

A glossary will be ready soon, and in the meantime I decided to share some notes on good and bad deflation, which are now close to a reasonable edit. After checking a few online references prior to this post, it quickly became obvious that the relationships between organizational factors versus national monetary policy factors for deflation, aren't always clear.

Organizational factors are microeconomic settings which lead to macroeconomic results, which in turn are considered "bad" inflationary or good deflationary in some instances. Whereas monetary policy is an initial macroeconomic action - one which also does not exist as a construct that is capable of generating good deflation. At best, the deflation that monetary policy might achieve would be neutral, as it relates to aggregate spending capacity. I especially need to be clear about these matters, because of what an equilibrium corporation would seek to accomplish in this regard. An equilibrium corporation construct, would include organizational capacity for non tradable sector good deflation, as a primary objective.

Good deflation can be thought of loosely as more product for relatively less cost. This, in contrast to the same amount of product for less cost (and consequently less product at some point) that would occur with bad deflation. In other words, greater marketplace expansion, due to organizational capacity which purposely seeks to reduce production costs over time for consumers (that is, not just the organization) where possible without sacrificing quality.

Often, good deflation can provide the same benefits as rising wages for bringing about prosperity, since it brings the marketplace closer to the consumer on sustainable terms which don't monetarily distort equilibrium. In particular, tradable sector activity generated tremendous progress in recent centuries through willingness to externalize the gains from greater organizational capacity. Hence more purposeful good deflation could be productive strategy, in a historical juncture when it is proving difficult to maintain rising middle (or other) class wages in spite of today's non tradable sector expectations.

As a supply side phenomenon, good deflation would likely not be difficult to distinguish from monetary policy, in the event central bankers become more willing to honor a nominal target level. While monetary policy has of late led to lower costs (in some respects), these occur because marketplace capacity and supply side potential is in the process of being destroyed, albeit slowly at the moment.

Granted, today's disinflation may only mean a little "what's the harm" destruction, but given the fact non tradable sector activity continues to crowd tradable sector activity, even a little disinflation can be too much, since the latter is composed of primary markets or first mover activity, which (today's) non tradable activity still has little choice but to rely upon. As businesses and consumers alike find themselves in worsening circumstance in a tight money environment, few are still able to gain from the bad deflation of poor monetary policy on real economy terms.

Bad deflation occurs when central bankers neglect to honor the aggregate spending capacity that already exists, in a given set of economic conditions. Why would policy makers refuse to maintain sufficient monetary representation for all concerned? When too many experts and policy makers assume that monetary policy - or the basics of supply and demand for that matter - don't really count, the result is economic participants who gradually lose the ability, to honor their social and monetary commitments to one another.

One reason central bankers increasingly find it tempting to take the unfortunate monetary tightening route, is due to the broader macroeconomic effects of what is essentially, purposeful intent at a microeconomic level. That said, the anti-competitive and exclusive nature of local asset and knowledge based services formation, exists for a reason: to maintain populations capable of maximizing a given area's wealth structure.

In other words, locals gain by maximizing costs for both knowledge/time based services and asset formation. However, everyone can't take this approach in aggregate. When many communities adopt a similar non tradable sector stance, doing so eventually negates the positive effects of good deflation and economic progress. This hurts everyone who can't keep up with the high local expectations for participation, along with the industries which of necessity built competition which extends well beyond local borders. Good deflation still has the potential to bring the progress that so many seek, within reach. Whereas the bad (monetary) deflation which also seeks to check internal inflation, eventually breaks down hard won progress. Yet it has proven difficult to address this problem, on general equilibrium terms.